[1] Almost at the end of its 1993 taxation year, Imperial Oil Ltd. made three short term loans to two corporations, each of which was a wholly owned subsidiary of a Canadian chartered bank. The banks guaranteed the loans, which totalled $500 million.

[2] The loans were structured so as to enable Imperial to claim an investment allowance for the amount of the loans, thereby reducing its taxable capital and decreasing its capital tax liability under Part I.3 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). If Imperial had made the loans to the banks, it could not have claimed them as an investment allowance.

[3] The Minister of National Revenue has relied on the general anti-avoidance rule ("GAAR") in section 245 of the Act to deny Imperial the tax benefit resulting from the investment allowance for which the loans otherwise qualified. The Minister argues that Imperial structured the loans so as to obtain the commercial benefits of short term lending and the security of lending to a bank, as well as the tax advantage of an investment allowance that is not available in respect of short term loans to banks. Hence, the Minister says, Imperial has tried to do indirectly (reduce its capital tax liability and obtain the commercial security of lending to a bank) what it could not have done directly by making short term loans to a bank.

[4] Accordingly, the Minister concluded that, for the most part, the loans were "avoidance transactions" within the meaning of subsection 245(3) which could reasonably be considered to result directly or indirectly in a misuse of the provisions of the Act, or an abuse having regard to the provisions of the Act, other than those creating GAAR, when read as a whole.

[5] Imperial appealed the Minister's reassessment to the Tax Court of Canada, which allowed the appeal: Imperial Oil Ltd. v. Canada (2002), D.T.C. 1954, [2003] C.T.C. 2754. The Minister has appealed that decision to this Court, arguing that the Tax Court Judge erred in failing to find a "misuse" of the relevant statutory provisions or an "abuse" when the Act is read as a whole.

[6] In our opinion, the Tax Court Judge made no reviewable error on these issues. Since this is sufficient to dismiss the appeal, it is unnecessary to consider Imperial's argument that the Judge erred in concluding that the loans constituted "avoidance transactions" from which Imperial obtained a "tax benefit".

B. FACTUAL BACKGROUND

[7] At all relevant times, Imperial's principal business was the refining, marketing and transporting of petroleum and petroleum products. It is subject to the large corporations tax ("LCT") under Part I.3 of the Act, which levies a flat tax on all corporations with capital in excess of $10 million at the end of their fiscal year. Imperial's fiscal year's end is December 31. One of the loans in question was made right at the end of November and the other two in December 1993. All three were repayable on January 4, 1994, the first business day of that year.

[8] In the course of its business, Imperial generates substantial surplus cash which, in 1993, amounted to $1,500 million. Imperial's cash management group directs the investment of the surplus and ensures that the company has adequate funds from its business revenues and maturing investments to meet its daily operating expenses.

[9] The group invests Imperial's surplus cash according to three criteria which, in descending order of importance, are: security of the principal, liquidity needs of the business, and rate of return. The activities of the cash management group are not regarded as a "profit centre" of the company. Throughout the 1993 taxation year, Imperial invested its surplus in three types of security. In descending order of capital security, they were: "government product", such as treasury bills; "bank product", such as bankers' acceptances and short term debt with financial institutions; and "commercial paper", that is, unsecured short term loans to corporations other than financial institutions.

[10] Throughout the taxation year 1993, the cash management group invested most of Imperial's surplus in treasury bills, although the percentage fell from 81% in March to 56% in December. In the same period, the percentage invested in "bank product" increased from 10% to 32%. The shift from treasury bills to bank product is attributable to the loans to the subsidiaries of the banks, which the cash management group classified as "bank product". In addition, the percentage of the funds invested in commercial paper was increased.

[11] The particulars of the loans in question are as follows:

1. November 30, 1993: $100 million loan to Royal Bank Export Finance Company Limited ("REFCO") for a term of 35 days at an interest rate of 3.93125%.

2. December 1, 1993: $200 million loan to REFCO for a term of 34 days at an interest rate of 3.8875%.

3. December 2, 1993: $200 million loan to Toronto-Dominion Holdings (USA) Inc. ("TDH") for a term of 33 days at the Canadian treasury bill rate

The loans to REFCO were guaranteed by the Royal Bank of Canada ("RBC") and the loan to TDH was guaranteed by the Toronto Dominion Bank ("TD Bank").

[12] In September 1993, RBC had sent an investment proposal to Imperial inviting it to lend money to REFCO, secured by a guarantee from RBC. The proposal included a legal opinion from the law firm of McMillan Binch to the effect that, while RBC is a "financial institution" within the meaning of paragraph 181(1)(a), its subsidiary, REFCO, is not.

[13] TD Bank is also a "financial institution" and is the parent of TDH, which holds shares in, and provides financing to, its subsidiary corporations.

[14] Another wholly-owned subsidiary of TD Bank, Toronto-Dominion Securities Inc., had sent an investment proposal to Imperial on November 1, 1993, inviting it to make a "properly documented loan" that "would qualify as an eligible investment, resulting in an investment allowance which would reduce Imperial Oil Limited's taxable capital." The covering letter stated:

Of particular note is that there is no minimum holding period requirement, although we recommend a 30 day term. This would allow Imperial Oil Limited considerably more flexibility than holding government securities, which have a minimum holding period of 120 days. It is also a conservative capital tax planning idea, which is supported by a favourable tax opinion provided by McCarthy Tétrault.

[15] The law firm of McCarthy Tétrault stated in its opinion

... a Loan made by a Lender to TD Holdings should qualify for an investment allowance for the purposes of the Act subject to the potential application of section 245 of the Act, the general anti-avoidance rule (as discussed below) ... absent the application of section 245, the guarantee of the Bank would not preclude a Loan from qualifying for an investment allowance under the Act.

The opinion letter also stated that GAAR would not apply to a loan to TDH because it was not an "avoidance transaction" under subsection 245(3), even if "the Lenders, in a transaction related to their loans, sold another investment that did not qualify for an investment allowance."

[16] Imperial made the loans and included them in its 1993 calculation of "investment allowance" under paragraph 118.2(4)(b). Liability for the Part I.3 tax was calculated in accordance with subsection 118.1(1), which imposed a tax of 0.225% on the amount by which a corporation's taxable capital employed in Canada exceeded its capital deductions for the year,including the investment allowance.

[17] The investment allowance of a corporation for a taxation year is the total of the carrying value at the end of the year of the following assets: the corporation's shares in another corporation; loans or advances to another corporation, other than a financial institution; and bonds, debentures, notes, mortgages or similar obligations of another corporation, other than a financial institution. Thus, a corporation's taxable capital and, consequently, the capital tax payable, is reduced if that corporation made a loan which qualifies as an investment allowance.

[18] In this case, the three loans qualify under Part I.3 of the Act as an investment allowance and reduce Imperial's liability for the LCT by $755,600. However, the Minister of National Revenue has invoked GAAR to deny Imperial most of this tax benefit. The Minister's reassessment disallowed $377.8 million of the $500 million lent by Imperial. At the start of the hearing before the Tax Court, the Minister further reduced the disallowed amount to $346.8 million. The Minister allowed the remainder because it could reasonably be attributed to sources, such as investments in commercial paper, which were eligible for the investment allowance and involved no misuse or abuse of the Act.

C. DECISION OF THE TAX COURT

[19] The Tax Court Judge allowed Imperial's appeal. He selected the $200 million lent to REFCO on December 1, 1993, as representative of the three loans and applied his conclusion to the other two.

[20] Following the approach to analysing a GAAR problem prescribed by Rothstein J.A. in OSFC Holdings Ltd. v. Canada, [2002] 2 F.C. 288, 2001 FCA 260 ("OSFC"), the Tax Court Judge found that the loan to REFCO resulted in a "tax benefit" to Imperial under subsections 245(1) and (2), because it reduced the corporation's tax payable under the Act.

[21] The Tax Court Judge also held that it was an "avoidance transaction" under subsection 245(3), saying (at para. 43):

The evidence leads me to conclude that the second loan to REFCO cannot reasonably be considered to have been undertaken primarily for a purpose other than to obtain a tax benefit.... I find that the primary purpose of the loan was to obtain a tax benefit.

The evidence to which the Judge referred included internal memoranda between employees in Imperial's cash management group, letters from law firms expressing favourable opinions about the tax reduction opportunity provided by the loans, and Imperial's financial stewardship reports.

[22] The more difficult issues were whether the loan constituted a misuse of the provisions of the Act or an abuse, having regard to the non-GAAR provisions of the Act when read as a whole. Applying the analysis in OSFC, the Tax Court Judge examined the policy objective and function underlying the treatment of investment allowances in subsection 181.2(4), and concluded that it was to avoid taxing essentially the same capital twice.

[23] In order to avoid double taxation, the amount of a loan should not be included in the capital of both the lender, even though the promise to repay is a capital asset of the lender, and the borrowing corporation, even though it has the benefit of the money lent prior to its repayment. Accordingly, the Act permits the lending corporation to deduct a qualifying loan from its capital as an investment allowance. The Judge reasoned that, since it would not infringe the policy against double taxation to treat Imperial's loan to REFCO as an investment allowance, the loan could not reasonably be regarded as a misuse of the provisions of the Act.

[24] The Judge then considered the position of financial institutions in the LCT scheme and found that, unlike the long term debt of financial institutions, a short term loan to a financial institution does not qualify as an investment allowance because the capital base of financial institutions is calculated differently from that of other corporations. Since short term loans to a financial institution are not included as part of its taxable capital, it is unnecessary to permit the lender to deduct them as an investment allowance in order to avoid taxing the same capital twice.

[25] The Tax Court Judge further supported his conclusion by noting that the loan to REFCO satisfied the investment criteria applied by Imperial's cash management group. The principal was secure because it was guaranteed by the Royal Bank; the amount lent was liquid because the term was not longer than 35 days; and, even though a fee was payable to REFCO and, consequently, the net interest rate was lower than it would have been on a loan to a bank, the rate of return was attractive once the tax savings were included.

[26] In finding that the loan was not a misuse of the specific provisions of the Act, the Tax Court Judge said (at para. 59):

... The Appellant simply followed the invitation in paragraph 181.2(4)(b) by purchasing more of one type of short-term security and less of another type. ...

[27] In his abuse analysis, the Tax Court Judge noted (at para. 62) that he had to consider the transaction in the wider context of Part I.3 as a whole. He concluded (at para. 67) that the loan was not an abuse of the Act because the policy underlying subsection 181.2(4) (the prevention of double taxation) would be offended if GAAR were applied to the loan.

D. LEGISLATIVE FRAMEWORK

[28] For present purposes, the relevant provisions of the Income Tax Act relating to the LCT are as follows.

Income Tax Act

181.1 (1) Every corporation shall pay a tax under this Part for each taxation year equal to 0.225% of the amount, if any, by which

(a) its taxable capital employed in Canada for the year

exceeds

(b) its capital deduction for the year.

(2) Where a taxation year of a corporation is less than 51 weeks, the amount determined under subsection 181.1(1) for the year in respect of the corporation shall be reduced to that proportion of that amount that the number of days in the year is of 365.

(4) There may be deducted from a corporation's tax otherwise payable under this Part for a taxation year an amount equal to the total of

(a) its Canadian surtax payable for the year, and

(b) such part as the corporation claims of its unused surtax credits for its 7 immediately preceding and 3 immediately following taxation years,

to the extent that that total does not exceed the amount by which

(c) the amount that would, but for this subsection, be its tax payable under this Part for the year

exceeds

(d) the total of all amounts each of which is the amount deducted under subsection 125.3(1) in computing the corporation's tax payable under Part I for a taxation year ending before 1992 in respect of its unused Part I.3 tax credit (within the meaning assigned by section 125.3) for the year.

...

181.2 (4) The investment allowance of a corporation (other than a financial institution) for a taxation year is the total of all amounts each of which is the carrying value at the end of the year of an asset of the corporation that is

(a) a share of another corporation,

(b) a loan or advance to another corporation (other than a financial institution),

(c) a bond, debenture, note, mortgage, hypothecary claim or similar obligation of another corporation (other than a financial institution),

[29] The general anti-avoidance rule (GAAR) is contained in section 245. The following provisions are directly relevant to this appeal.

245. (2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

(3) An avoidance transaction means any transaction

(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

(4) For greater certainty, subsection 245(2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.

[30] The purpose of GAAR is to prevent abusive tax avoidance to which more specific anti-avoidance rules do not apply: Vern Krishna, The Fundamentals of Canadian Income Tax, 7th ed. (Toronto: Carswell, 2002) at 862. Thus, if a taxpayer does not satisfy the statutory requirements of a provision on which the taxpayer relies, the Minister need not resort to GAAR. Similarly, GAAR is not needed if a more specific anti-avoidance rule applies, such as subsections 110.6(6), (7) and (8) which close particular loop-holes relating to the capital gains exemption.

[31] In other words, GAAR is the anti-avoidance provision of last resort. It purports to provide a framework to distinguish between legitimate tax minimization and abusive tax avoidance. As Krishna notes (at 858): "Tax minimization is legal and acceptable; abusive tax avoidance is not."

[32] By confining legitimate tax avoidance to schemes that are not inconsistent with the policy underlying the statutory provision invoked by the taxpayer, GAAR effectively limits the scope of the principle in Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 at 19 that "[e]very man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be". Indeed, if the scheme considered in the Duke of Westminister was used in Canada today it "would probably be caught" by GAAR: Peter W. Hogg, Joanne E. Magee, Jinyan Li, Principles of Canadian Income Tax Law, 4th ed. (Toronto: Carswell, 2002) at 584.

[33] Moreover, the House of Lords itself has recognized that, as an aid to the interpretation of taxing statutes, the famous dictum in the Duke of Westminster emanated from an era when statutory interpretation was based on a literal approach. It thus seems out of step with modern jurisprudence which has extended to tax legislation the purposive approach taken to other statutes: see, for example, W.T. Ramsay Ltd. v. Inland Revenue Commissioners [1982] A.C. 300 at 316-17; Inland Revenue Commissioners v. McGuckian [1997] 1 W.L.R. 991 at para 25.

(ii) Judicial guidance on GAAR

[34] Writing for the majority of this Court in OSFC, Rothstein J.A. set out the three steps of a GAAR analysis. First, a court must determine if there is a "tax benefit" within the meaning of subsection 245(3). If there is not, GAAR will not apply and the inquiry ends. If there is a "tax benefit", a court must take the second step and determine whether there is an "avoidance transaction" under subsection 245(3). If there is no "avoidance transaction", GAAR will not apply and, again, the inquiry ends.

[35] If the transaction confers a "tax benefit" and constitutes an "avoidance transaction", a court must take the third step and determine whether the transaction is a "misuse" or an "abuse" under subsection 245(4). This inquiry involves taking two smaller steps.

[36] First, a court must determine "if it may reasonably be considered that the transaction would not result directly or indirectly in a misuse" of the provisions of the Act. To determine if there has been a misuse, a court must identify the object, or underlying policy or policies, of the relevant provision or provisions of the Act, and decide if the avoidance transaction is contrary to those objectives or policies. If it is, the transaction constitutes a misuse and GAAR applies.

[37] However, if there is no misuse, the second smaller step must be taken. This requires a court to decide if the transaction is an abuse, having regard to the provisions of the Act, other than those dealing with GAAR, when read as a whole. The question is whether the transaction contravenes any policy or policies underlying the provisions of the Act as a whole. If it does, the transaction may constitute an abuse for the purpose of GAAR.

[38] In OSFC Holdings, Rothstein J.A. stated (at para. 70) that only a "clear and unambiguous" policy is relevant for the purpose of the misuse and abuse analysis:

...subsection 245(4) cannot be viewed as an abdication by Parliament of its role as lawmaker in favour of the subjective judgment of the Court or particular judges ... Where Parliament has not been clear and unambiguous as to its intended policy, the Court cannot make a finding of misuse or abuse, and compliance with the statute must govern. [Emphasis added]

[39] While the Act does not expressly provide that the policy must be "clear and unambiguous", this is implicit in the language of subsection 254(4), which permits the exemption for a tax avoidance scheme where "it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act ... read as a whole."

[40] Thus, if the scheme may reasonably be considered not to result directly or indirectly in a misuse or an abuse, GAAR does not apply: in effect, the taxpayer is given the benefit of any doubt. Consequently, for GAAR to apply it must be clear that the provisions of the Act are being misused or the Act as a whole is being abused. It is not enough that a court might reasonably consider them to be misused or abused.

(iii) "Misuse" and "abuse"

(a) French and English texts of subsection 245(4)

[41] The English and French versions of subsection 245(4) differ in two respects. First, the French text uses only one word, "abus", to describe the conduct required to bring a transaction within GAAR. Harrap's French and English Dictionary (London: Harrap Books Ltd., 1989) defines abus in English as "abuse, misuse", while Le Nouveau Petit Robert (Paris: Le Robert, 1993) defines it in French as "usage mauvais, action d'abuser d'une chose, excessif ou injuste". However, the English text uses two words: "misuse" in respect of specific statutory provisions, and "abuse" in respect of the Act as a whole.

[42] Second, unlike the English text, the French text does not distinguish between "provisions of this Act" and "provisions of this Act ... read as a whole". Thus, the French text provides that GAAR only catches transactions that constitute "d'abus dans l'application des dispositions de la présente loi lue dans son ensemble ... ".

[43] In OSFC Holdings Rothstein J.A. commented on the difference between the English and French versions of subsection 245(4). He noted that Bowman J.T.C.C. had said in RMM Canadian Enterprises Inc. v. R., [1998] 1 C.T.C. 2300 at para. 49 (T.C.C.):

The use of "misuse" and "abuse" in the English version rather than simply "abus" in the French version is attributable to a linguistic nuance rather than a shading of the legislative intent.

Rothstein J.A. concluded (at para. 60):

Having regard to the observation of Bowman, J.T.C.C., I would interpret the French version as including both the tests in the English version.

(b) the meanings of "misuse" and "abuse" in the English text

[44] The words "misuse" and "abuse" have not been defined in the Act and are said to have "no clear meaning" (Hogg, McGee, and Li, at 581). While sometimes used interchangeably, they have slightly different nuances.

"misuse of the provisions of this Act"

[45] The Shorter Oxford English Dictionary, 5th ed. (Oxford: Oxford University Press, 2002) defines to "misuse" as to "use or apply for a wrong purpose". Vern Krishna, The Fundamentals of Canadian Income Tax, 6th ed. (Scarborough: Carswell, 2000) at 873, defines the misuse of a provision as an avoidance transaction that offends the underlying purpose of a specific rule:

It is important to distinguish between the purpose of a particular provision and its effect. A taxpayer can use a provision to mitigate taxes (the Westminister principle) if he or she does not offend its purpose.

Thus, a transaction only amounts to a misuse for the purpose of GAAR when it contravenes the policy, objective or function of the provision or provisions on which the taxpayer relies in order to avoid or minimise tax.

[46] Subsection 245(4) refers to "the provisions of this Act" not "the provision of this Act". Hence, when undertaking the misuse analysis, a court is not necessarily limited to determining whether a course of action misuses the one provision on which the taxpayer specifically relies, but should also consider related provisions. In this case, the Minister must show that the provisions relating to the investment allowance have been misused by demonstrating that the loan was structured so as to defeat a clear and unambiguous policy underlying subsection 181.2(4).

"abuse" having regard to the non-GAAR provisions of the Act "read as a whole"

[47] Clause 186 of the Minister of Finance's Technical Notes, Canada, Department of Finance, Explanatory Notes to Legislation Relating to Income Tax (Ottawa: Department of Finance, June 1988) states that subsection 245(4) draws upon the civil law doctrine of "abuse of rights", on which see, for example, John E. C. Brierley and Roderick A. Macdonald, eds., Quebec Civil Law: An Introduction to Quebec Private Law (Toronto: Emond-Montgomery, 1993) at 154, 250, and 287, and Jean-Louis Baudouin et Patrice Deslauriers, La Responsabilité Civile, 6e édition (Cowansville: Yvon Blais, 2003) at 186-92, and 204-34.

[48] The Technical Notes also say (at clause 186):

A transaction may be abusive having regard to the Act as a whole even where it might be argued, on a narrow interpretation, that it does not constitute a misuse of specific provisions. Thus in reading the Act as a whole, specific provisions will be read in the context of and in harmony with the other provisions of the Act in order to achieve a result which is consistent with the general scheme of the Act.

Thus, even if Imperial's loan does not misuse the investment allowance provisions of the Act, it will be caught by GAAR if it can reasonably be regarded as constituting, directly or indirectly, an abuse of the provisions of the Act, having regard to the non-GAAR provisions of the Act read as a whole.

(iii) Did the loan "misuse" provisions of the Act?

(a) the policy of the provisions

[49] One must infer from the statutory language the policy, if any, on which the relevant provisions of the Act are unambiguously based. This exercise in statutory interpretation must be undertaken with the assistance of such extrinsic aids as: judicial statements, Hansard, ministerial or departmental statements, explanatory notes, bulletins, circulars, texts, periodicals and others: see Howard J. Kellough & Peter E. McQuillan, Taxation of Private Corporations and their Shareholders, 3d ed. (Toronto: Canadian Tax Foundation, 1999) at 16:123.

[50] The LCT was one of the measures introduced in the Budget of April 27, 1989, to reduce the federal deficit, and became law on October 23, 1990, with the enactment of Bill C-28. It broadened the corporate tax base by ensuring that large corporations bore a greater and more appropriate share of the corporate tax burden. Hence, only corporations with capital in excess of $10 million at their year end are subject to the LCT.

[51] The LCT is unique in effectively imposing a minimum tax on large corporations, because the amount of capital tax payable by a corporation is reduced by the amount of income tax that it has paid: subsections 181.1(4) and (5). "Minimum tax" is defined by Black's Law Dictionary, 7th ed. (St. Paul: West Publishing Co., 1999) as "a flat tax potentially imposed on corporations ... to ensure that ... [they] do not avoid all income tax liability by using exclusions, deductions and credits".

The budget proposes to levy additional taxes on the corporate sector to help reduce the federal deficit. The Large Corporations Tax will ensure that all large corporations pay federal taxes and thus contribute to deficit reduction. In the first full year of application, the Large Corporations Tax is expected to increase federal revenue by about $965 million.

Similarly, when introducing Bill C-28 in the House of Commons, the Hon. Gilles Loiselle, Minister of Finance, said (Commons Debates, 23-11-1989, at 1:22):

Let me remind you of the context in which the budget measures are presented. That is the commitment of the government to reducing the deficit and the burden placed on the economy by our national debt.

More particularly, he added, Part I.3 will "ensure that all large companies pay federal taxes and thus contribute to debt reduction."

[53] Another general policy of the LCT was to keep all corporate tax rates lower than they would otherwise have been if the total tax revenues collected from the corporate sector were to be maintained. Thus, the imposition of the LCT shielded smaller corporations from a higher tax burden: seeDepartment of Finance, 1989 Budget Papers at 41, and Report of the Technical Committee on Business Taxation (Ottawa: Department of Finance, December 1997) at 4:19.

[54] However, these general statutory objectives are of only peripheral relevance in determining if Imperial's loan constitutes a misuse of provisions of the Act for the purpose of the GAAR analysis. They only provide the broader context of the provisions on which Imperial relies in order to claim the tax advantage flowing from the treatment of its loan as an "investment allowance" under subsection 181.2(4).

[55] The computation of LCT is described as follows by David M. Williamson, "Large Corporations Tax" in Report of Proceedings of the Forty-Second Tax Conference (Toronto: Canadian Tax Foundation, 1989) at 11:5-11:

First, one computes the amount of capital as defined less an investment allowance to compute total capital. The resulting total capital amount is reduced by the $10 million exemption. The resulting net capital number is then multiplied by the prevailing tax rate.

For convenience, we set out again the relevant provisions of the charging section of the Act:

181.1. (1) Every corporation shall pay a tax under this Part for each taxation year equal to 0.225% of the amount, if any, by which

[56] A corporation's taxable capital is reduced by expenditures that qualify for the "investment allowance", which is defined in subsection 181.2(4). The provisions relevant to this appeal are as follows:

181.2 (4) The investment allowance of a corporation (other than a financial institution) for a taxation year is the total of all amounts each of which is the carrying value at the end of the year of an asset of the corporation that is

...

(b) a loan or advance to another corporation (other than a financial institution),

[57] Imperial submits that the policy underlying subsection 181.2(4) is the avoidance of double taxation. Counsel relies on the following statement from the 1989 Budget Papers at 41):

An investment allowance will be provided to avoid double taxation where the capital of one corporation is not employed directly by it but, instead, is invested in another corporation. In general, shares of other corporations, loans and advances to other corporations, and bonds, debentures, mortgages and other securities issued by other corporations, will constitute eligible investments in computing its taxable capital. No investment allowance will be provided in respect of loans to, deposits with, or any other investments in financial institutions (other than shares or long-term debt of the institution), since such investments are not included in the capital of the institution.

[58] However, it is important to note that, even though REFCO is not a financial institution, Imperial's loan to it could never have formed part of REFCO's capital for LCT purposes. This is because it was made in December to be repaid in January, and REFCO's fiscal year end was June 30. Hence, subject to GAAR, Imperial is entitled to claim the loan as an investment allowance, even if the amount of the loan will not be taxed at all.

[59] Thus, Imperial's argument must bethat, since the terms of the transaction and the parties' fiscal year ends would result in the payment of no tax on the amount of the loan, Parliament intended subsection 181.2(4) to avoid even the potential for double taxation. However, the Minister submits that subsection 181(4) expressly indicates Parliament's concern that capital should be neither exempted from capital twice, nor included in capital twice:

181. (4) Unless a contrary intention is evident, no provision of this Part shall be read or construed to require the inclusion or to permit the deduction, in computing the amount of a corporation's capital, investment allowance, taxable capital or taxable capital employed in Canada for a taxation year, of any amount to the extent that that amount has been included or deducted, as the case may be, in computing the first-mentioned amount under, in accordance with or by reason of any other provision of this Part.

[60] Despite the interpretive presumption in subsection 181(4) against the double deduction of the same amount, the Minister concedes that Imperial's loan qualifies as an investment allowance under the LCT provisions, even though it would not be taxed as part of the capital of either Imperial or REFCO. However, the question is whether permitting Imperial to retain the tax benefit to which it is entitled by virtue of subsection 181.2(4) would be inconsistent with a clear and unambiguous policy on which this provision is based.

The CCRA would consider the application of the general anti-avoidance rule (section 245) where transactions have not been undertaken or arranged primarily for bona fide purposes other than to obtain a "tax benefit", as defined in subsection 245(1), which would include the reduction of Part I.3 tax. For example, a temporary shift of assets otherwise ineligible for the investment allowance to assets which would qualify, particularly where the shift is undertaken at or near the end of the corporation's year end, would be subject to examination. [Emphasis added]

[62] Further, CCRA's Income Tax Technical News,No. 22, January 11, 2002, at 3, discussed the top five areas where GAAR has been applied, including "the avoidance of large corporation Part 1.3 tax." The cases dealing with the avoidance of Part I.3 tax

generally involve a temporary acquisition and disposition (over a corporation's year end) of assets eligible for the investment allowance so as to reduce Part I.3 tax. The assets temporarily acquired yield a rate of return lower than the assets ordinarily held.

[63] In addition, CCRA representatives at the Canadian Tax Foundation's 2001 annual conference indicated that the application of GAAR to prevent the avoidance of the LCT was an area of special interest to the CCRA and one in which GAAR has most often been applied: see Greg Boehmer and Stephen Landau, "Update on Capital Tax and Interprovincial Tax Planning", Report of Proceedings of the Fifty-Fourth Tax Conference (Toronto, Canadian Tax Foundation, 2002) at 24:12.

[64] However, the views expressed by CCRA on the applicability of GAAR are no more than that. They do not identify any clear legislative policy underlying the investment allowance provisions that this loan violates. Nor do they carry any special weight when it comes to the interpretation or application of the Act.

[65] The policy contained in subsection 181(4) against interpreting the Act so as to permit deducting the same sum twice does not apply to the facts of this case. Because the loan did not form party of REFCO's capital at the end of its fiscal year, it was never "deducted".

(b) did the transaction "misuse" provisions of the Act?

[66] In our view, the "provisions of the Act" primarily relevant for determining whether the transaction constitutes a "misuse" are those relied upon by the taxpayer: here, the provisions dealing with the investment allowance. Other provisions may provide an explanatory context, such as those creating a separate regime for financial institutions which explain why short term loans made to financial institutions do not qualify for an investment allowance.

[67] However, to focus the misuse analysis on the policies that underlie the introduction and essential design of the LCT would bring nearly every transaction designed to avoid or reduce LCT within GAAR. This would be inconsistent with the purpose of subsection 245(4), which is that GAAR only applies to avoidance transactions that constitute a misuse of the provisions of the Act. Counsel for the Minister advances three arguments to support his position that the loan constitutes a misuse of the provisions of the Act.

[68] First, it is a statutory policy not to provide an investment allowance for loans to financial institutions. It would be a breach of this policy if Imperial were able to retain the tax advantage of an investment allowance in respect of money lent to a wholly owned subsidiary of a bank that guaranteed the loan.

[69] We do not agree. It is not the policy of Part I.3 to discourage short term loans to banks. Such loans do not qualify as an investment allowance because the LCT provisions relating to financial institutions exclude such loans from their taxable capital: subsection 181.3(1). Since REFCO is not a financial institution, its taxable capital is calculated on the same basis as all other corporations that are not financial institutions.

[70] The fact that REFCO's parent is a bank and guaranteed the loan is not a reason for regarding the loan as made to a financial institution or as contrary to the policy providing that short term loans to financial institutions do not qualify as an investment allowance. The only relevance of the bank guarantee is that the loan thereby met Imperial's first lending criterion, security of the principal. It is not the policy of Part I.3 to encourage corporations to lend to borrowers who lack the creditworthiness of financial institutions.

[71] Second, counsel argued that the loan enabled Imperial to obtain indirectly what it could not obtain directly: the tax advantage of an investment allowance and the commercial security of a loan to a bank. In our view, this argument does not establish the breach of a policy underlying the investment allowance provisions of Part I.3. Imperial's loan both qualified as an investment allowance backed by the kind of security that few borrowers other than banks can offer, and escaped taxation in the hands of the lender, because Parliament did not deal with the implications of the fact that corporate parties to a loan may not have the same fiscal year end.

[72] For this argument to succeed, counsel must establish that Imperial indirectly lent money to a bank. Although REFCO is a wholly owned subsidiary of a financial institution, its business is different from that of its parent: financing accounts receivable, and providing guarantees against the insolvency of obligors of accounts receivable. The money lent by Imperial was available for use by REFCO, not by RBC. The bank and the subsidiary have separate legal identities and are subject to different codes of taxation under Part I.3 of the Act. The fact that the bank guaranteed the loan did not make it a borrower of the money lent: Federated Co-operatives Ltd. v. Her Majesty the Queen, [2001] DTC 5414 at 5420 (FCA).

[73] In brief, contrary to the position taken on behalf of the Minister, the transactions under consideration in this case are not "financial institution short term debt", even though Imperial's cash management group included them in its investment category, "bank product". There was, in other words, no divergence between the effect of the transaction and its legal form.

[74] Third, counsel for the Minister argued that it was contrary to the policy underlying the investment allowance provisions that the same amount of capital should escape from being taxed in the hands of either the lender or the borrower. Thus, a loan by Imperial to any corporation with a different fiscal year end from its own should be caught by GAAR, provided that the loan was made primarily to reduce or eliminate Imperial's liability to LCT. Counsel argued that such a loan would defeat the object of Part I.3, that is, ensuring that large corporations pay a minimum amount of tax in order to reduce the deficit by raising revenue, and to protect smaller corporations from higher rates of tax.

[75] As we have already indicated, the difficulty with this argument is that it would apply to any tax planning transaction designed principally to reduce a corporation's taxable capital, and it is clear that Parliament did not intend to characterize all avoidance transactions as a "misuse" of provisions of the Act.

[76] Thus, if counsel for the Minister were correct, a loan to a company with assets of significantly less than $10 million would also be caught by GAAR if it was an avoidance transaction. Accordingly, if Imperial could have claimed as an investment allowance the amount of a loan made to any company with a different fiscal year end, or with capital of less than $10 million, we see no reason why it is contrary to the policy underlying the investment allowance provisions that the borrower is the wholly owned subsidiary of the financial institution that guaranteed the loan. In our view, the policy objectives or function of the investment allowance provisions of the Act do not mandate such a result.

[77] Moreover, it is relevant to determining whether the loan constituted a misuse that the terms of the transaction were perfectly ordinary. Thus, the loan was consistent with the criteria used by Imperial for investing its surplus cash. In addition, it was interest-bearing, even though, without the tax benefit, the real rate of return was somewhat lower than Imperial could otherwise have obtained because it had paid a fee to the bank for arranging the loan. The period of the loan and the guarantee were consistent with normal commercial practice. The loan included no artificial elements that lacked a commercial purpose.

[78] In short, the loan had a bona fide commercial purpose, even if its primary purpose was the saving of tax, as the Tax Court Judge concluded when he found that the loan was an avoidance transaction. A finding of a "misuse" of the investment allowance provisions cannot be based on the fact that Imperial increased the proportion of its cash invested in "bank product" in order to obtain a higher rate of return as a result of the tax saving, with no decrease in the security provided by a loan to a bank. It is difficult to characterize this transaction as either aggressive or adventuresome.

[79] No doubt Imperial took advantage of a loophole in the statutory scheme, namely the failure to deal with the consequences of different corporate year ends. But, as we have already indicated, that cannot in and of itself amount to a "misuse" of the statutory provisions. Indeed, it must have been perfectly foreseeable to Parliament that large corporations would make short term loans to other large corporations which spanned the end of the lender's financial year, but not the borrower's, so that both corporations would escape the LCT on the amount of the loans.

[80] The scheme established by Parliament thus virtually invited the use of different corporate fiscal year ends as the basis for the calculation of taxable capital. In contrast, Parliament pre-empted another equally foreseeable device for avoiding the LCT, namely the division of capital among related corporations so that each has a capital value of less than $10 million. Only one $10 million deductible is available to related corporations and is allocated among them: see subsections 181.5(1) and (2).

[81] To summarize, there are three reasons why Imperial's loan to REFCO may reasonably be considered not to result, directly or indirectly, in a misuse of the investment allowance provisions of the Act. First, the loan did not violate the purpose for which Parliament provided that a short term loan to a financial institution does not qualify as an investment allowance. Second, since the loan to REFCO was not made to a financial institution, it did not enable Imperial to do indirectly what it could not do directly. Third, the loan was an ordinary commercial transaction, with no artificial elements, undertaken for both tax and non-tax purposes.

[82] Hence, the Minister has not persuaded us that the Tax Court Judge made any reviewable error in allowing Imperial's appeal from the reassessment.

(c) did the transaction constitute an "abuse", having regard to the provisions of the Act "read as a whole"

[83] Counsel for the Minister argues that, in determining whether there has been an "abuse", the Court should have regard to the wider statutory context of the LCT, and not just to the provisions relating to the investment allowance. In particular, he submitted, it is clear from the Act that a corporation's capital at its fiscal year's end is intended to be representative of the value of its capital over the entire year and, hence, to be an appropriate basis for calculating liability to LCT. Thus, since the loan to REFCO reduced Imperial's capital at year's end to a level well below its level for most of the year, it frustrated the statutory policy of using one date as a reliable and convenient proxy for averaging out the amount of capital over the entire the tax year.

[84] We do not agree with the Minister's argument that there is a clear policy that a corporation's capital at the end of its fiscal year should be representative of its capital throughout the year and that Imperial breached this policy by making 30 day loans close to the end of its fiscal year. The value of a company's capital can only be measured at a single moment in time: there is no reason to think that the time when a corporation's capital is measured is representative of the value of the capital over the year.

[85] If Parliament had intended to use the average value of a company's capital over the year as the basis for determining liability to LCT, it could have required companies to report the value of their capital at several points during the year and calculated LCT by reference to an average capital value. However, this would have imposed a very onerous administrative burden on taxpayers. Parliament may thus have chosen a single valuation date, the end of a company's fiscal year, purely as a matter of convenience.

[86] Moreover, nothing in the materials to which we were referred supports the Minister's contention that Part I.3 tax is calculated on the assumption that the value of a corporation's capital at its year end is representative of its value over the year. Unlike the Ontario Corporations Tax Act, R.S.O. 1990 c. C-40, Part I.3 prescribes no minimum period before a loan qualifies as an investment allowance.

[87] In short, the Minister has failed to establish that the Tax Court Judge made any reviewable error when he concluded that there was no abuse because the loan was not contrary to any clear and unambiguous policy of Part I.3 of the Act when read as a whole.

The Court affirmed the finding of the Tax Court that the claiming of an investment allowance by the taxpayer on short-term loans made by it close to the end of its calendar fiscal period to a bank subsidiary, with the loans being guaranteed by the parent bank, did not result in a misuse or abuse for purposes of s. 245(4). The taxpayer was not indirectly lending money to a bank, as the business of the borrower was different than that of its parent and the money was available for use by it and not the bank; and "the fact that the bank guaranteed the loan did not make it a borrower of the money lent" (p. 6054). Although the taxpayer "took advantage of a loophole in the statutory scheme, namely the failure to deal with the consequences of different corporate year ends" ... "it must have been perfectly foreseeable to Parliament that large corporations would make short term loans to other large corporations which span the end of the lender's financial year, but not the borrower's, so that both corporations would escape that LCT on the amount of the loans" (p. 6055). Further, the Court could not agree with the Minister's submission "that there is a clear policy that a corporation's capital at the end of the fiscal year should be representative of its capital throughout the year", as Parliament had not chosen to require companies to report the value of their capital at several points during the year (p. 6055).

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